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A new farm program that adds to crop insurance coverage

One of the few programs that could affect crop producers this year IF a new farm bill becomes law over President Bush's expected veto is the permanent disaster program. It covers crop years 2008 through 2011.

That's a big IF, of course. The House, which could vote on the bill this week, passed its own version last year along mostly party lines, by a vote of 231-191, That's far short of the two-thirds needed to override a veto. The Senate passed its farm bill by a comfortable 79-14 margin. But the tax issues that kept House Republicans from voting for the bill last summer may have been resolved enough for many to support the final bill this time. On Monday, some last-minute questions about the five-year cost of the farm bill were holding up its final release by the conference committee.

So, IF the law takes effect yet this year, farmers will need to learn yet another farm program acronym: SURE.

SURE stands for SUpplemental REvenue (SURE) Assistance Payments.This is the permanent disaster program that generated a lot of debate during the writing of the Farm Bill. At times it pitted Corn Belt members of the agriculture committees against those from the Great Plains, where crop insurance and other safety net programs haven't always worked well for wheat farmers facing multiple years of drought.

SURE differs a lot from disaster aid bills passed in recent years, says Tom Buis, President of National Farmers Union, the farm group that put permanent disaster aid at the top of its farm bill wish list.

"The assistance goes only to those producers who can demonstrate a loss, not if you're in a county or an adjacent county that has a loss," Buis told Agriculture Online recently.

In the past, if you were in a county declared a disaster by the Secretary of Agriculture, you could get paid if you had losses in certain fields even if your entire farm had no loss in revenue. And you might not have had to buy crop insurance before being eligible for disaster payments.

Under the Farm Bill's new disaster program, a congressional staffer explained to Agriculture Online in an e-mail message, "SURE Assistance requires a producer to be in a Secretarial declared disaster or contiguous county... If [producers] purchase minimal coverage with the Sure Assistance program, disaster assistance will be minimal as well. In reality, this program pushes producers to greater reliance on crop insurance than any prior disaster program."

The new program calculates all of a farm's expected revenue, including that from noninsurable crops. And you must buy at least low-value CAT (catastrophic) coverage to get disaster payments.

One congressional staffer familiar with the program says that those who bought only the virtually free CAT coverage in the past won't benefit much more from the new program. (CAT is 50% of actual production history, or APH, times 55% of the USDA's insurable price.)

"50% X 55% X 115% results in protection levels at approximately 31.5% coverage assuming the producer insures his/her entire farm at CAT levels," the staffer explained. "Clearly, SURE will mean CAT insured will need to seriously evaluate 'buy up' coverage if they want the security of disaster coverage."

On the flip side, SURE will do a reasonable job of covering shallow losses for those who do buy higher levels of crop insurance.

"The higher up they buy, the better coverage they get," Buis said.

"All producers will be eligible. It's not just for the eight major commodities," Buis added.

No eligible producer can receive more than $100,000 in total disaster assistance, a limit that has been in effect in the past. The farm bill's new Adjusted Gross Income means tests and direct attribution also apply to disaster payments.

For most farmers, if you buy high levels of crop insurance coverage, it's possible to get protection on up to 90% of a whole farm's expected revenue from the new SURE program. .

In a nutshell, here's how SURE works.

If you live in a county declared an agricultural disaster, or a county next to it, the USDA calculates a guaranteed level of income, called the Supplemental Revenue (SURE) assistance program guarantee. If your total farm revenue falls below that guarantee, you'll get a payment. It will be 60% of the difference between your revenue and that SURE Assistance guarantee.

Here's how the guarantee is calculated for insurable crops: You start with your yield. That can be an adjusted APH. Of if you've had years of drought and it's really low, you can use the yield USDA uses to calculate your counter-cyclical program payments. Multiply that by your percentage of crop insurance yield guarantee times your crop insurance price election, times the acres planted (or prevented from planting) times 115%. Under this formula, if you buy higher levels of coverage, your guarantee is going to go up.

In essence, the government will pay you 15% over your insured coverage, plus allow you to boost the insurable yield some if you've had multiple years of poor crops.

If you grow uninsurable crops, you've also got to be enrolled in the Noninsured Assistance Program. Those crops are added to the guarantee calculation, using either adjusted APH or CCP payment yield, times acreage, times 100% of the NAP established price times a factor of 120%. (Since you can't buy up from NAP, which is normally based on half the APH and only 55% of the price, the government gives you a break on NAP crops, allowing 100% of price and giving you a 20% boost over coverage.)

All that is the first step of determining payments.

From that guarantee, the government will subtract total farm revenue.

To calculate income, it will leave almost no stone unturned. Your crops' value will be calculated by multiplying your harvested acres by estimated yield by USDA's national average market price for the marketing year. The government will also add in: crop insurance or NAP indemnities, any other disaster payments, 15% of your direct payments, all marketing loan proceeds and all counter-cyclical or average crop revenue payments. USDA is also supposed to adjust market prices to reflect average quality discounts applied to local or regional market prices.

According to a congressional staffer who helped design SURE, here's how the program would have workedin 2006 on a hypothetical Kansas farm with 1,200 acres of winter wheat/summer fallow and 700 acres of grain sorghum:

The farm's insured yields are 35 bushels per acre for the wheat and 55 bushels an acre for the milo. The adjusted APH is 38 bushels for the wheat and 58 bushels for the milo. The counter-cyclical payment yields are 32 bushels for wheat and 48 for milo.

Using the higher yield of 38 bushels for wheat from 1,200 acres at an insured price of $4.81 a bushel, the farm's expected revenue for wheat is $219,336. The 700 acres of 58-bushel/acre milo, valued at $2.73, is $110,838. The total projected revenue from those crops is $330,174.

Both crops are insured at the 70% level and a 100% price election. Using the higher adjusted APH (not the insured value) times those price elections gives the farm adjusted insurance protection totaling $231.121.80 for both crops. Multiply that by 115% and the SURE guarantee is $265,790.07.

In this case, with SURE, the farm has a revenue guarantee of 80.5%

According to one scenario provided by the congressional staffer, here's how SURE would work if that farm has a modest yield loss, the kind that crop insurance doesn't cover very well. Let's say the farm's wheat yield is 24 bushels an acre, just under a 37% yield loss. At 70% yield coverage, the indemnity payment on 1,200 acres of wheat is $2,866. The milo, with a 36-bushel yield (almost 38% loss) gets an insurance payment of $4,777.50.

This example assumes these crops are sold at the insured price. The revenue from the reduced crop, insurance payments and 15% of $28,000 in direct payments totals $230, 527.50. That's $35,262.57 below the SURE guarantee. When that $35,262.57 is multiplied by 60%, the farm gets a payment of $21,157.54.

On this same farm, if the grower bought a higher level of coverage, say 75% on both crops, then the SURE guarantee jumps to $284,775.08 (86.25% of expected revenue). The same shallow losses in yields give the farm a payment of $23,334.80.

"And because SURE Assistance treats the entire farm across all crops as the insurable unit, producers who might succumb to moral hazards by shifting production from unit to unit won't benefit through SURE," the congressional staffer added. "That's because it captures all of the production for the entire farm."

Of course, USDA hasn't written the regulations for this program yet, but this is how congress's ag committee members expect the program to work -- IF the farm bill becomes law.

One of the few programs that could affect crop producers this year IF a new farm bill becomes law over President Bush's expected veto is the permanent disaster program. It covers crop years 2008 through 2011.

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